It’s alright now, isn’t it?

Neil Birrell
Premier Miton’s Chief Investment Officer

This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of financial market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.

On the home front

A month ago, I wrote one of these notes which focused almost exclusively on the UK political and economic scene. It was impossible to avoid commenting on the instability in government, the “go for growth” economic policy triggered by the mini-budget and the dramatic moves in financial markets, particularly the UK government bond (gilt) market. Well, a month is a long time in politics! We have a new Prime Minister, a new cabinet, a reversal of economic policy and an Autumn Statement due on 17 November.

We have also had another, expected, increase in the base rate by the Bank of England. This time it was 0.75%, making the current round of increases the fastest in decades. However, it does not look like they are pushing ahead as much as feared from here. Concerns about what might happen to growth are at the forefront of their minds and they continue to walk the tightrope between beating inflation and avoiding deep recession.

On the other side of the pond

The US central bank, the Federal Reserve (Fed), has also announced an increase of 0.75% in their interest rates. This was the fourth consecutive increase of that size and reiterates the Fed’s focus on beating inflation. As always, the accompanying statement and the press conference that followed are analysed in great detail for signs of what the Fed may be thinking about future policy.

The statement that was released with the announcement of the increase, did give some signs that the Fed thought that the end may be in sight for further hikes. However, at the press conference, the Chair of the Fed, Jerome Powell, did not leave us in any doubt that the fight was still on and was not as optimistic in tone as the Bank of England were about when interest rates might peak. Although, it’s not unknown for him to “talk tough”, as that can make a difference to behaviours as well. Overall, the outlook has changed little as a result, with the peak in US interest rates currently expected to be around 5%, towards the middle of next year.

The US economy is in good shape, with the jobs market remaining strong, along with most other economic indicators, there is hope that the world’s largest economy can avoid recession. Whilst I think that is unlikely, any recession should be relatively shallow, which is good news for the rest of the world.

One final comment on the US, the mid-term elections will take place this month, this occurs halfway through a president’s term in office, and we may see a change in which party controls Congress, which is the only part of the government that can make new laws or changes to existing laws. It is hard to know how much difference that might make, but probably not enough to influence the economy or financial markets at this stage.

Big tech’s results season

No, I was wrong, one final, final comment on the US; overall, last month, US stocks performed well despite the disappointing third quarter results reported by some of the big technology companies towards the end of the month. This included Microsoft, Alphabet (Google’s parent company), Meta (previously known as Facebook) and Amazon, which forecasted weak consumer demand in the upcoming Christmas holiday period. Apple was the relative outperformer even though iPhone sales were lower than expected as this was offset by improving proceeds from its Mac line of computers.

These companies, which are usually put together under the heading of FAANGs, have become a very large part of the US stock market, indeed they have been a major driver of the rise over recent years. However, they became expensive on valuation grounds as result, which has led to many, if not most, commentators to predict sharp falls in their share prices. There is clear evidence of this and it is appropriate to be cautious on the outlook for their share prices.

Eyes east

The Chinese Communist Party held its 20th Congress. These are five year gatherings where President Xi Jinping was confirmed in his third five-year term and the authorities continued their adherence to the zero COVID policy. Similarly, the economy in China is heavily reliant on the property sector, which has been under pressure for some time and is likely to remain under a cloud if the outlook worsens.

This was not taken well, as fears that the world’s second largest economy would not generate the levels of growth that had been expected came to the fore. China is important for world growth and with geo-political risks difficult to quantify, there is another headwind for investors, globally, to consider.

The big question

The question I am asked the most is; what is the outlook for financial markets? Given that the December edition of this note will give a brief review of 2022 and, more importantly, some thoughts on 2023, I will not steal my own thunder here.

However, the answer is not simple and it does vary by asset class. As a teaser for next month, let’s look at bonds briefly.

Let’s not forget inflation and interest rates are still going up; that is not usually a good backdrop for bonds. But, they have fallen a long way and are, arguably, taking into account much of the bad news. Bonds are usually considered to be lower risk investments, for some time, in my view, they have not provided attractive returns for the level of associated risk and they have been a bad asset class to have been invested in this year. That risk / reward profile has changed dramatically. However, any higher returns may not protect investors from the effect of inflation over time.

The last word

Back to the UK.

Investors typically have a domestic bias, meaning they favour investment opportunities in their own country or region. This can simply be because they feel more comfortable with their level of understanding, or feel that international investments carry higher risk or they do not want foreign currency exposure.

I sit more in the camp that investors should look for investment opportunities all around the world; why limit yourself? Therefore, funds I am directly responsible for, will only have exposure to the UK if the outlook is good and there are investments in different asset classes that compare well to all others. Given the upheaval we have been through and the reaction of financial markets; there are now a lot of opportunities in the UK to take advantage of.

 

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Risks

All types of investment carry a degree of risk. It is possible you could lose some, or all, of the money you invest. The level of risk varies depending on the type of investment.

Reference to any particular investment or asset class does not constitute a recommendation to buy or sell the investment or asset class.

Equities (shares) can experience high levels of price fluctuation.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Where investments in a fund are denominated in currencies other than sterling (for example, if a fund holds assets priced in euros), its value will be affected by changes in the relevant exchange rate. Certain other investments, such as the shares in companies with profits from other countries, will also be effected.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds.

Changes in central bank interest rates can affect all types of assets, in particular, securities such as government bonds and corporate bonds that generally offer a fixed level of interest. If interest rates go up, the value of a bond may fall, and vice versa.

Future forecasts are not reliable indictors of future returns.

Glossary

Asset class
Different groups of investments such as company shares, bonds, commodities or property.

Bonds (or fixed income)
Types of investments that allow investors to loan money to governments and companies, usually in return for a regular fixed level of interest until the bond’s maturity date, plus the return of the original value of the bond at the maturity date. The price of bonds will vary and the investment terms of bonds will also vary.

Deposit
An amount of money placed with a bank or other financial institution; these may take different forms and have different names, such as certificate of deposit. Deposits may pay fixed or variable rates of interest and may have set maturity dates.

Equities
Another name for shares (or stock) in a company.

IMPORTANT INFORMATION:

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content of this document, please speak to a financial adviser. The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

Whilst every effort has been made to ensure the accuracy of the information in this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, we may monitor and record calls for training and quality-assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

008045/081122

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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